Information about Understanding Supply Markets and Competition

Effective procurement requires that P&SM; professionals approach their roles with a high-level view of supply markets and the competitive factors that affect these markets (Monczka et al., 2009).

Porter’s (1985) five forces analysis can provide a useful framework for understanding these issues:

degree of competition: a high degree can create more options for buyers and suppliers, with factors including speed of industry growth, capacity utilisation, exit barriers, product differences, switching costs and diversity of competitors;

threat of new entrants: for example, low-cost-country manufacturers such as China are eroding the competitiveness of traditional industries in the west;

threat of substitute products and services: as an example, new sets of growing composites, thermosets and carbon fibres are replacing traditional elements such as steel;

the power of buyers: increasing power is leveraged over suppliers in the market when buyers consolidate specifications and industry standards emerge

the power of suppliers: fewer suppliers in a market increase the power levels among these individual suppliers.